What is meant by Capital Gains Tax and is there any way which I can reduce the amount I have to pay?

Capital Gains Tax

What is meant by Capital Gains Tax?

In its simplest from Capital Gains Tax is a form of taxation which must be paid on any profits which are made from any of your investments.

Annual Capital Gains Allowance

An individual will only be required to pay Capital Gains Tax on investments which are over a specified amount called the annual capital gains allowance.

What is the Annual Capital Gains allowance for 2010?

The Annual Capital Gains allowance for individuals for 2009-10 is set at £10,100.

What is the percentage required to be paid for Capital Gains Tax?

Following the abolition of the 10% Capital Gains Tax rate all individuals are liable to pay Capital Gains Tax on all capital gains over the £10,100 threshold at a rate of 18%.

How is Capital Gains Tax applied to my assets?

The amount of Capital Gains Tax which an individual will pay depends on the period of time for which they have held that asset.

For example, any asset which is bought after 5 April 1998 a process called “taper relief” will apply. Taper Relief means that the longer you hold the asset for the less tax you will have to pay on any of the gains which you may have made.

How does taper relief work?

Currently there are two kinds of taper relief. They are as follows:

  1. Taper relief for business assets

  2. Taper relief for non-business assets

Which kind carries the best tax benefits?

The tax regime for business assets is the most favourable of the two. Basically it breaks down to if an individual holds an asset for more than two years they will only pay tax on 25% of the gains made by that investment.

Indexation allowance

What is meant by indexation allowance?

If you owned the asset on or before 5 April 1998 you may be able to reduce the taxable gain by claiming indexation allowance. Indexation allowance will reduce the effect of inflation over the years since you first bought the asset.

When will I need to pay Capital Gains Tax?

You will be required to pay Capital Gains Tax on the following gains:

  • If you stop owning, by way of selling, giving away or exchanging any asset or part of that asset

  • If you receive any because of an asset – this may occur when you receive compensation due to any damage to an asset

Are there any gains which are exempt from the need to pay Capital Gains Tax?

The following gains are exempt from the requirement to pay Capital Gains Tax for 2010:

  • The sale of your car

  • The sale of your main home – there are however, some qualifying conditions in relation to this

  • Cashing in on ISAs or PEPs

  • The sale of personal belongings up to £6000 in value

  • Winnings that have been made by gambling, the lottery or the football pools

  • Any money which will be included as part of your income which you will already have paid income tax on

How do I make a Capital Gains Tax return?

If you complete a Self Assessment tax return, there will be a requirement to complete a specific section dealing with Capital Gains Tax.

What happens if I do not complete a self assessment tax return?

If you do no not complete a self assessment tax return but you wish to report gains or losses then you should contact your local tax office.

When should gains be reported to the tax authorities?

Gains should be reported by 5th October following the end of the tax year.

Are there any ways which I can reduce my Capital Gains Tax bill?

You can reduce the amount of Capital Gains Tax you are required to pay using the following techniques:

  • Offsetting losses against gains

  • Transferring assets to your spouse

  • Transferring assets to a charity

  • Making the best use of the exemptions

  • Deferring the gain

  • Selling assets and buying them back

Offsetting losses against gains

If an individual holds a range of assets there is the possibility that the individual will also record losses on some of the assets. This is most common in the situation whereby an individual holds a variety of different shares. If this is the case the best course of action is to dispose of the assets which have shown a loss at the same time. Accordingly the individual can then set that loss against a taxable gain.

Transferring assets to your spouse

The Capital Gains allowance applies specifically to individual persons. This means that a married couple will have a Capital Gains allowance of £20,200 for 2009-2010 compared to an individual who has a Capital Gains allowance of £10,100. If an individual transfers assets to their spouse to dispose of then they can effectively double their Capital Gains allowance.

Furthermore gifts which are transferred between a husband and wife who are living together are ignored for the purposes of calculating Capital Gains Tax.

However, you cannot simply provide assets to your children in order to try and avoid paying Capital Gains Tax.

Transferring assets to a Charity

If you transfer any of your assets to a registered charity then you will not be required to pay Capital Gains Tax.

Making the best use of the exemptions

You can make the best use of the above exemptions to reduce the amount of Capital Gains Tax you will be required to pay on your assets. For example, if you own two homes you can decide which one you wish to treat as your primary residence for tax purposes within two years of acquiring the second one. You can make the best use of the above exemption simply by choosing the one with the greatest increase in value. Accordingly when you sell this house you will not be required to pay Capital Gains tax on the profit you make thereby reducing your total payable Capital Gains Tax.

Deferring the Gain

If you do not have any losses or reliefs which you can use to offset your tax bill you can defer the payable Capital Gains Tax by reinvesting the gain in the following:

  • Venture capital trusts

  • Shares of certain small companies

Selling Assets and Buying them back

You can reduce the amount of Capital Gains Tax which you are required to pay by selling your assets and buying them back. This reduces the requirement to pay Capital Gains Tax on long-term investments.

Can I sell them and buy them back immediately?

It used to be the position that you could sell the assets and buy them back the next day. However, this is now outlawed until after 30 days from the original sale.

What other options are available to me?

An individual still has the following options available to them when buying back assets:

  • An individual can arrange for their spouse to buy an identical holding

  • An individual can immediately buy something similar

  • An individual can buy an option to protect against a price increase during that 30 day period